Bank's short-term loans go a long way

Palatine banker Robert G. Hershenhorn was dressing casually for work long before it became a quasi-accepted industry practice. Even now, depending on the weather, he stretches the concept by showing up for client meetings in shorts and a T-shirt.

At First Bank & Trust Co. of Illinois, where the 56-year-old Mr. Hershenhorn is chairman and CEO, his iconoclasm extends to more fundamental banking practices.

By lending short and churning loans, piling up origination "points" and other charges, the bank will earn more than $50 million this year, he says, on assets that will have sextupled in just five years, to a projected $1.25 billion.

By both key measures of banking performance  return on equity (54%) and return on average assets (4.75%)  First Bank is off the charts. Next year, barring recession or portfolio problems, net income is expected to hit $75 million.

Other bankers, too, are wondering, particularly about what will happen to First Bank when the next downturn hits.

Mr. Hershenhorn acknowledges that he attracts borrowers rejected by other lending institutions. But he insists the credits, almost exclusively in commercial real estate, are secure, bolstered by an industry-standard loan loss reserve of about 1% of assets and by other, less-commonplace practices.

'Why argue?'

Indeed, some of First Bank's alleged tactics have upset a few borrowers and former borrowers. According to one ex-customer, one of a handful of developers who threatened a lawsuit, an out-of-court settlement that he estimates probably totaled more than $1 million was recently reached with the bank.

Among their allegations: unexpected fees, miscalculation of interest expenses and failure to apply payments promptly to accounts.

Mr. Hershenhorn does not dispute problems with certain customers. But he says they are an anomaly. "We just decided  why argue with the guy?" he says. He says the bank has never been sued and adds: "I don't think I've ever settled with five customers in 25 years, in any kind of dispute."

Other customers have shrugged off what they believe to be excessive charges, considering these a cost of doing business with a rare lending institution that took an early flier on them.

"To have somebody lend me a lot of money when I needed it was worth a lot," says Jeff Gelman, a residential developer whose projects include the 202-unit condominium project at 1250 N. LaSalle St. No longer banking in Palatine, he adds, "Look at me now."Mr. Hershenhorn, who owns the bank outright and puts his net worth at more than $500 million "and growing rapidly," cites several hard-nosed practices that would seemingly turn off potential borrowers, while, he argues, protecting the bank against a real estate collapse. (In fact, during the last downturn, in the early '90s, which put many banks on the ropes, First Bank's return on average assets slumped, but to a still-rosy 1.94%.)

"It's not really a traditional bank," notes Lee Pollock, a managing director at Capri Capital L.P. and a former First Bank senior vice-president. "It is a specialty real estate finance company that uses the bank as a funding vehicle."

The bank's Subchapter S status also spurs reported returns, which are pretax and must be incorporated by Mr. Hershenhorn into his own income-tax statement.

What further accelerates earnings is First Bank's ultra-lean staff of no more than 45 employees, essentially in one location, which contributed to the bank's rock-bottom expense ratio. "It's like that Irv's clothing concept: inconveniently located," quips Mr. Hershenhorn.

Cutting red tape

Besides net interest margins that average a whopping 6.75% to 7.00%, First Bank counts on other portfolio insulators, including personal guarantees on all loans, never issuing a commitment letter and what Mr. Hershenhorn calls "demand features"  the ability to call any loan at any time. When that clock starts ticking, the interest rate jumps to 24%, he says.

Why do customers put up with all that?

Dan Mahru, president of residential developer Rezmar Corp., remembers getting an okay within a week  on the same terms a Loop bank had reneged on at the last minute  on a $4-million loan to acquire a townhouse loft site two years ago at 2929 N. Western Ave.

"I like them because they cut through a lot of red tape," say Mr. Mahru. "On occasion, there are mistakes. If you're saying we have to watch our statements, we have to watch our statements from every bank."

Another Chicago residential developer, Paramount Homes, has remained a customer of First Bank, despite what sources say was its paramount role in the threatened lawsuit and negotiations that led to a settlement.

"Can I say, 'No comment?' " replies Paramount President Bruce Fogelson. Insists Mr. Hershenhorn: "No one's leaving us. Not even Fogelson. These guys, at the end of the day, like our bank."

At the same time, Mr. Hershenhorn does not mind customers like Mr. Gelman, who do "graduate" from First Bank. Unlike many banks that make construction and other short-term loans in order to induce customers into "mini-perm" and longer-term debt, First Bank is just the opposite. It likes repeat customers  but repeat deals even more.

"We focus on really short-term loans that have a life of 12 months or less," Mr. Hershenhorn says. "The quicker I can churn those dollars, the better off I am. . . . I'm collecting 30 points over a five-year period where another lender is collecting only two points."